Buy the dip no longer sounds sufficient to calm fears, nor will forward guidance. Jerome Powell will have his first test with his congressional testimony. Until then, expect this battle for confidence to be a bumpy ride, writes Bob Savage, CEO of Track Research Friday.
The speed of change matters. Turbulence follows anything that moves fast whether it’s a plane, boat or a market.
The S&P 500 (SPX) shift from record high to 10% correction and a test of the 200-day was the fastest in history. The offset to this volatility comes from the size of the actual correction – modest in comparison to the previous 4 episodes in this bull market.
The 2011 move down was 19.4% as an example. What really bothered traders last week is causality and correlation. Bull markets don’t die of old age but are killed by policy mistakes. The trust in the technocratic rule of central banks cracks with their talk of moving from extraordinary negative rates and bond buying to something else.
The rise in volatility reflects the uncertainty of how this reaction to a global coordinated recovery will play out throughout 2018.
On one hand, the obsession with liquidity drives the equity market correction. On the other, the need for a higher risk premium for U.S. debt thanks to its government fiscal policy and to its above trend growth drives the present correction.
The U.S. isn’t alone in the urge for returning to a policy mix where investors have to pay for their returns by taking real risks, but weaning off such may require some harsh lessons. Rates and policy changes are both being blamed for the moves in all risk-assets over the last two weeks. Whether this is all a healthy position washout or the start of a larger problem remains to be seen, it’s up to the pilots – the central bankers – to determine how they handle the economic turbulence that will follow this hit to market confidence.
Many want to believe this is a simple task because there isn’t any obvious trigger from economic events. However, buy-the dip no longer sounds sufficient to calm fears, nor will forward guidance about future QE unwinds or rate-hikes sound friendly.
The new FOMC Jerome Chair Powell will have his first test at the end of this month with his congressional testimony. Until then, expect this battle for confidence to be a bit of a bumpy ride.
